For most councils, budgeting for 2013-14 involves an extremely difficult balancing act between maintaining essential services and the financial health of the organisation.

Councils' reserves are one of the important and sometimes controversial components in this tricky equation. Concerns are often expressed about the level of reserves held – currently around £13bn for English councils – and the argument is advanced that if reserves were deployed more boldly, services could be protected from the worst impacts of austerity. If only the position was that straightforward.

Reserves are held for a variety of different reasons. Some relate to known and relatively certain future costs such as a planned building project. Others concern possible, though less certain, liabilities such as the costs associated with extreme weather. This is where we move into questions of judgment and prudence.

If reserves are depleted, a severe winter or a period of exceptionally heavy rainfall has the potential to generate significant unbudgeted costs which the council will only be able to fund by cutting other services. The event may never arise – but if it does, the consequences for the authority's financial sustainability may be devastating.

Reserves are a hedge against risk. Demand for public services is increasing at the same time that income from sources such as planning application fees and parking charges are falling. Though predictable in general terms, these trends are difficult to quantify and forecast precisely. Reserves provide a fallback if there is a painful gap between the assumptions made in the budget and the trends which actually emerge.

In 2013-14, budgets will include a range of initial financial assumptions about new government initiatives to allow local authorities to retain a proportion of business rates and to localise responsibility for council tax benefit schemes. Inevitably there is risk and uncertainty around these new arrangements as they are rolled out for the first time. Local councillors will sleep easier if they know that there are reserves to help manage any difficulties which may emerge.

For all of these reasons, reserves will undoubtedly loom large in budget debates across the country over the next few weeks. In some cases, councils will decide to draw down an element of reserves to address a potential gap in funding. In doing so they will need to exercise great care, including working through medium and long term consequences.

The nature of most local services is that they require recurring funding to meet staff and running costs year after year. Reserves are a one-off, finite source of funding. They can cover a shortfall in recurring funding for a specific period but, after they have been exhausted, the underlying shortfall will still be there. To solve the problem, services will need to be reduced to a level which is affordable within the envelope of funding available.

Rather like in a household which is living beyond its means, savings can help to put off the dreaded day when cutbacks must be made, but they cannot prevent the inevitable.